Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

This Just In: Upgrades and Downgrades

Goldman goes negative on Citigroup. Sorta.

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...Goldman Sachs finally pulled its buy rating on Citigroup(NYSE: C) Friday, ending a nine-month endorsement that netted it a near-21% profit on the stock.

Pretty smart stockpicking, huh? There's just one hitch: The S&P 500 actually gained more than 21% over those same nine months. In other words, in recommending Citi, Goldman actually managed to underperform the market for nine months straight. So why pull out now?

When bankers break upWhat extinguished Goldman's love for Citi? Was it the revelation that Citigroup, along with Bank of America(NYSE: BAC) and Wells Fargo(NYSE: WFC), is facing potentially billions of dollars in legal costs tied to its role in the 2008 financial crisis? Or was it perhaps Bloomberg's revelation that Citi lost money on 21% of the trades in made last year?

No. Goldman sees nothing scary in either of these facts; Citi's losses last year were less frequent, and less damaging, than what it incurred in 2009. Instead, Goldman called it quits because of the market's "focus on capital returns" (i.e., profits) and the lack of an obvious catalyst to push Citi shares higher.

Most analysts on Wall Street believe that the best we can expect see from Citi over the next five years is about 6% annual growth -- a number inferior to the growth estimates for B of A, Wells, and even Goldman Sachs itself. And apparently, Goldman thinks 6% simply isn't not enough to justify the P/E on Citigroup, which now sits north of 13. Hence, Goldman is shelving its Citi rec, and assigning the stock a "neutral" rating. But is Goldman right?

Let's go to the tapeAt first glance, this seems an open-and-shut case. Citi's got a PEG ratio of more than 2.2. It's clearly overpriced. Goldman's right to shun it.

However, Goldman's record in making such obvious calls in megabanking isn't quite as good as you might expect. It's been wrong about Citi, but also about Bank of America, JPMorgan Chase(NYSE: JPM), and Allied Irish Banks:

Company

Goldman Rating

CAPS Rating(out of 5)

Goldman's Picks LaggingS&P by

JPMorgan

Outperform

***

7 points

Bank of America

Outperform

***

26 points

Allied Irish

Outperform

***

63 points (!)

Clearly, when it comes to picking megabanks, even that most infamous of megabankers, Goldman Sachs, is capable of making mistakes. So while I personally don't intend to buy Citigroup shares at today's price, perhaps it's worth taking a look at why the shares might be attractive to Fools more eager to rush in (where Goldman fears to tread) than I.

To my mind, there are two main reasons why an investor might want to take a flyer on Citigroup today: The first has to do with the bailout. For more than a year, the U.S. government owned, and had been steadily selling off, a sizeable stake of Citigroup shares. That selling pressure helped to keep the stock price in check -- but in December of last year, it ended. In one final, massive heave, Treasury pushed the last of its Citi shares out the door and onto the market, unloading 2.4 billion shares at $4.35 apiece.

Citi's endgameFully public once more, Citi shares now trade based on their demand by buyers, rather than one really big seller's need to unload them. But what might create buyer demand for Citi today?

That leads us to the second reason I mentioned. Goldman may be right about Citi looking unattractive in some respects, including slower growth and a more expensive P/E than some of its rivals. But in other regards, Citi actually stacks up pretty well relative to the competition:

Bank

Price-to-sales ratio

Price-to-book value

JPMorgan

2.1

1.1

Citi

2.2

0.9

Wells Fargo

2.5

1.4

SunTrust Banks(NYSE: STI)

2.4

0.9

BB&T(NYSE: BBT)

2.9

1.2

As you can see, Citi's got one of the lowest prices around, relative to the amount of revenue it generates. Its price-to-book value ratio looks similarly attractive -- only B of A is cheaper. Even Goldman admits there's a lot to like about Citigroup today, including its "exposure to emerging markets, continued book value growth, potential excess capital position and valuation relative to peers." (Emphasis mine.)

Foolish takeawayI'm not saying that Citigroup is a screaming bargain worth buying in bulk. I'm simply saying it's not as simple as "Goldman hates Citi. You should, too." According to our CAPS stats, Goldman Sachs is only right about 40% of its Diversified Financial Services picks, and only 33% of its recommendations in Commercial Banking work out. Maybe you can do better.

Fool contributorRich Smithdoes not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 593 out of more than 170,000 members. The Motley Fool has adisclosure policy.

The Fool owns shares of Bank of America, JPMorgan Chase &, and Wells Fargo. Through a separate Rising Star portfolio, the Fool is also short Bank of America.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.